Beyond the Bonus Headlines, Goldman Sachs Has Been Solid

True, this is a holiday phenomenon more prevalent in Manhattan, or London, Tokyo, Hong Kong or Shanghai, the world financial capitals where investment bankers and their entourages traditionally congregate. But it's spilling over to ski slopes at Vail, beaches on St. Barts, certain hotels in Miami Beach and Las Vegas, a bevy of fancy restaurants and bars — just about anywhere that suddenly seems too expensive for all the rest of us.

I read in The Wall Street Journal that the top five investment banks in New York alone will be bestowing a staggering $36 billion in bonuses on their employees this holiday season, according to executive search firm Options Group. That's up from $21.5 billion just a year ago. After a year of surging equity markets, record mergers and acquisitions, and mercifully few financial catastrophes, Wall Street is awash in money. No wonder several friends of mine seemed so smug at a holiday party this weekend when they mentioned, ever so subtly, that they'd been told their annual bonuses the previous week.

My own feeling is, if you can't beat them, join them. And by that I do not mean rush out and enroll in the nearest MBA program. It's much simpler to buy stock in a publicly traded investment bank, like the gold standard of the genre, Goldman Sachs (GS).

I have owned Goldman shares since shortly after it went public in 1999. I have never sold any, and it remains one of my core holdings. My only reservation at the time was that investment banks would prove to be like many Hollywood companies, where the talent walks off with all the profits. But I have known a number of investment bankers at Goldman over the years, and I have been consistently impressed by their work ethic, their competitive drive, their intelligence and breadth of knowledge, and most important, their integrity. Goldman has had the rare scandal, but overall, its culture seems to have done a remarkable job of instilling its core values in its employees.

My faith in Goldman has been rewarded over the years — only to a small fraction of the typical Goldman bonus, perhaps, but significant nonetheless. Last week, Goldman shares hit a new high of $206 before retreating slightly, and last Tuesday the firm reported record fourth-quarter and full-year profits of $3.15 billion and $9.54 billion on revenues of $9.41 billion and $37.67 billion. It's one thing for an Exxon Mobil (XOM), with its vast oil reserves, to report record earnings when oil prices are at $70 a barrel. But consider that Goldman has no tangible assets to speak of beyond its human capital. That makes it a little more understandable that Goldman is paying out a record $16.46 billion in employee compensation this year, an average $750,000 for each of its roughly 22,000 employees, from the loftiest managing director to the mailroom clerks. While much higher than last year, that's 40% of total revenue, a record low, and down from 43% last year. As a shareholder, I applaud that.

Goldman's sterling performance has pretty much laid to rest lingering doubts about its new chief executive, Lloyd Blankfein. When Blankfein replaced Henry Paulson earlier this year, some Goldman purists sniffed that he was a trader who lacked the polish of investment bankers, and that he'd gotten into the firm laterally, when Goldman acquired a trading firm where Blankfein worked. But I haven't heard a word since Goldman reported trading revenues of $25.56 billion, not only a record, but the largest portion of the firm's revenues. For better or worse, Goldman is a major trading firm. Owning shares is like having a piece of a hedge fund, without paying the exorbitant fees.

I have only two reservations for investors who are now pondering whether they should buy Goldman shares. The first is timing. Goldman shares rise and fall with the fortunes of Wall Street, and historically there have been much better opportunities. Given the importance of trading profits, and their inherent volatility — even for traders of Goldman's stature — there will likely be further pullbacks which would offer more attractive entry points. Goldman shares were as low as $139 this past summer. The second is less tangible. I've recently spoken with two business people involved in Goldman deals this year. Both said that Goldman bankers young enough to have been their children were insufferably arrogant. I hope their Goldman elders will remind them that pride goeth before a fall.

More broadly, I do sometimes ponder the disproportionate financial incentives we bestow on certain endeavors in the financial world, while many talented, highly educated college professors, classical musicians, and architects, to name just three underpaid professions, eke out a living. I can't claim any remarkable insights.

In the meantime, I neither envy my investment banker friends at Goldman nor aspire to join their ranks. I continue to enjoy their company. After all, since I'm a Goldman shareholder, they're at least in part working for me.

Yet now we've gotten one. This is great for my Caremark shares, and I feel vindicated in my view that investors were undervaluing the benefits of the CVS deal. Still, this throws a wrench in the strategy that led me to buy CVS options, which had been gaining so nicely. For now I'm holding onto them. Should CVS lose out to the new bidder, its shares should still fare well (all those investors who hated the deal presumably prefer a stand-alone CVS.) If it succeeds, investors may give it new respect now that someone else has valued Caremark shares so richly. The danger, of course, is that CVS will raise its offer and overpay.